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New Advanced Inventory Planning Technology – Generate Positive Cash Flow
By Richard F. Vaccaro and David Grand
Until recently, small and mid-size enterprises
(SMEs) did not have affordable, easy-to-use software tools to help
them effectively manage and balance their inventory investment. Software
solutions that forecast, plan and optimize an inventory are found
in widespread acceptance in large enterprise companies, but these
solutions can cost from hundreds of thousands to millions of dollars
and as a result are generally not affordable by SMEs.
In most cases, spreadsheets are the most common inventory management tool used by SMEs. They are time-consuming to build and maintain, are usually static data repositories, and, according to a study by a major consulting firm, over 90 percent of them contain significant errors.
For organizations that carry an inventory, such as manufacturers, wholesalers
and retailers, that investment is often their largest asset. The cost of carrying
excess and obsolete stock, as well as not having sufficient saleable inventory
to meet demand, is enormously high. It is common to find excess and obsolete
stock representing 30 to 60 percent of inventory and to find that 5 to 40 percent
of the time, customer demand cannot be met. The latter often results in expediting
vendor orders at a premium cost that cannot be passed through (based on our research
and experience). On a $10M inventory, that means potentially $3M to $6M is being
misspent, a high price to pay for any size company.
The solution
Business management solutions today, like accounting and ERP software, have basic inventory control functions such as storing and tracking sales data, costs and inventory balances (on-hand and on-order). Most let the user manually set Min, Max and Reorder quantities but, like spreadsheets, this is a time-consuming, mostly static and error-prone process. The good news is there are solutions to automate and dramatically improve inventory planning. These new software solutions are known as decision support or advanced planning solutions and some of these are now available at an affordable cost for any size enterprise. These solutions do not replace transaction or business management systems but are complementary to them.
The advanced planning systems use existing transaction data to plan future inventory needs. Some of these solutions cover all the planning processes in one integrated planning engine.
Overall, these solutions automatically:
| • |
Forecast demand and use business rules and optimization
models to effectively determine how much stock to hold and
where to stock it. |
| • |
Apply algorithms for demand planning (forecasting). |
| • |
Generate replenishment orders that are more
balanced for high customer service, minimizing excess inventory
and stock-outs. |
| • |
Provide visibility on how well the company is
working toward its goals (i.e., inventory savings especially
of excess and obsolete inventory and turns), supporting customer
service levels, and increasing sales volume. |
| • |
Manage and display inventory at all locations
in the network. In the case of distribution, this tends to
be multiple warehouses; in service organizations this extends
to service technicians' trunk stock; in retail it includes
stores and warehouses and even inventory at customer sites. |
The results
Companies using these advanced inventory planning and optimization solutions have very specific metrics they use to measure the change in business performance. The metrics usually cover three major areas:
1. Cost reduction and avoidance
2. Productivity gains
3. Increased customer satisfaction
Here are actual customer results from two implementations:
*Hold
for Parts means a service repair person does not have the right
parts the first time on the call and has to make a second or
third visit to complete the repair. Term is used in the Office
Equipment market.
Advanced inventory planning solutions impact the bottom line in
the following three ways.
1. Cost reductions and avoidance in:
• Current and long-term inventory investment
• Physical space requirements (rent, contents insurance,
heat,
light and power, etc.)
• Emergency shipments
• Expedited orders
• Current, open replenishment orders
• Future purchase quantities
• Planning time
• Service technician call-backs for on-site service
repair calls
• Manual processes
• Mistakes and errors
• Lost sales
• Lost customers
2. Revenue generation through increases in:
• First-time fill rates for new orders
• First-time completion rates for service repair calls
• Repeat sales
• Cross-sell/up-sell
• Employee satisfaction
• Customer satisfaction
• Asset utilization (ROA)
3. Productivity gains via improvements in:
• Employee utilization and effectiveness
• Vendor relations
• First-time fix rates for (service organizations)
• Employee satisfaction
• Inventory process reliability
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